From Texas, I mostly cover the energy industry and the tycoons who control it. I joined Forbes in 1999 and moved from New York to Houston in 2004. The subjects of my Forbes cover stories have included T. Boone Pickens, Harold Hamm, Aubrey McClendon, Michael Dell, Ross Perot, Exxon, Chevron, Saudi Aramco and more. Follow me on twitter @chrishelman.

McMoran Shares Plunge On Delays In Ultra-Deep Davy Jones Well

Aargh, we’re tired of waiting for the booty from Davy Jones locker! Walk the plank McMoran! That’s the sentiment today towards McMoran Exploration, which has for months now kept investors waiting for a final production test of its ultra-deep, shallow-water Davy Jones No. 1 well in the Gulf of Mexico.

McMoran shares (NYSE:MMR) plunged 22.5% on Monday in advance of an update from the company on its struggle to bring Davy Jones on line. The sell off continued Tuesday, with shares down another 11% to $8.50 at noon, though well off their lows for the day.

Responding to the share plunge, in a conference call at 11 a.m. central, McMoran Chairman Jim Bob Moffett explained that although the bottom of the Davy Jones well was currently plugged and stubbornly resisting attempts to get it flowing, he was confident that investors would soon get some good news.

“Rest assured, we’re going to unplug this thing, and the minute we know more, you’ll know more,” said Moffett, who later in the call dismissed the notion that McMoran might have to plug and abandon the well.

It wasn’t supposed to be this way. By now investors expected Davy Jones to be flowing 50 million cubic feet a day of natural gas from its giant reservoir. With the company burning through cash on a high-risk drilling campaign, further delays could potentially wipe equity holders out.

Seldom has one oil and gas company had so much riding on one well. But Davy Jones is a landmark. At 30,000 feet underground it’s so deep that in drilling and completing the well McMoran has had to engineer new equipment to endure searing downhole pressures and temperatures topping 400 degrees. McMoran disclosed in October that it has sunk more than $960 million into this single well, which is certainly an industry record.

Davy Jones was so eager to cough up its bounty from a massive high-quality reservoir 200 feet thick that McMoran several months ago had to control the flow by filling the hole heavy drilling mud. Right now, the company says, it has removed that mud from the hole, but it believes that barite from the oil-based mud has blocked the flow. In its update yesterday, McMoran says it is injecting a barite solvent to clean out the perforations, or holes in the drill pipe, through which the gas will flow. “At any minute,” said Moffett today, the immense pressure from the reservoir “could blow out the mud.” They’ll only know for sure, he said, when they hear the freight-train sound of fluids blasting up the well and into test tanks.

If it works, the well should soon be brought on line. If not? There is a concern among investors that Davy Jones is doomed. The pipe goes so deep, that the bottom lengths into the reservoir are just a few inches in diameter. This leaves little room for tools to maneuver and even less room for error. Could it be that all the efforts to keep Davy Jones under control may have inadvertently killed it? And even if Davy Jones does turn out to be a gusher, with all the easier and safer wells to be driller in onshore shale plays, is McMoran’s high level of risk worth an uncertain reward?

Moffett reminded investors that there’s a lot more to the company than just Davy Jones. A few years back it was Moffett who had the guts to take over an ultra-deep prospect called Blackbeard that ExxonMobil spent $200 million drilling, then gave up before getting deep enough to hit the pay zone, scared off by the high pressures. McMoran went back into Blackbeard with heavier equipment and discovered natural gas reservoirs hundreds of feet thick. McMoran has since drilled a second well into Davy Jones (using a fatter pipe), proving that the reservoir structure stretches over 20,000 acres, and is now drilling a second Blackbeard well, currently at a depth of 25,200 feet. It’s also below 25,000 feet on the onshore Lineham Creek well, which has a target depth of 29,000 feet. And in the Lomond North prospect, it’s below 10,700 feet heading down to 30,000 feet deep.

Moffett has proven that enormous reserves exist at remarkable depths, and (like Captain Ahab chasing Moby Dick) he’s determined to crack the code on how to complete these wells and bring them on line.

But assuming this can even be done, will today’s McMoran shareholders participate in the prize? In the nine months through September McMoran had a net loss of $144 million on $293 million in revenues. At the end of the third quarter the company had $190 million in cash against total debt of $560 million. Today its equity market cap stands at $1.24 billion. McMoran will need a lot more cash to finish work on all its challenging wells. And it will have a low likelihood of attracting new capital until it has proven, through Davy Jones, that it can get them flowing and paying back their investment. If it takes too long, the cash burn could end up putting the company in the hands of its lenders, and erasing any equity value.

With that in mind, on the conference call today Lee Cooperman, chairman of Omega Advisors, and a leading investor in McMoran, expressed concern that the company could run out of cash as early as the end of the first quarter of 2013. He asked Moffett what the potential was for bringing fresh capital into the company, to which Moffett had little response other than to say they would go about seeking options in a businesslike manner.

The Davy Jones downdraft has also caught McMoran’s big partner Energy XXI, which is down about 15% in the past couple days, as well as Plains Exploration, which owns a big tranche of McMoran shares that it got in exchange for selling Moffett a bunch of shallow Gulf acreage.

Another company watching the situation intently is Chevron, which is partnered with McMoran as operator (and 50% working interest holder) of the Lineham Creek well. Chevron also recently teamed up with McMoran to acquire a host of leases. Among the supermajors Chevron likely has the most acreage in the shallow waters of the Gulf where these ultra-deep prospects lay. But don’t expect Chevron to sail to the rescue. Very few companies have the balance sheet or stomach for ultra-deep exploration. Chevron knows that if McMoran shareholders drown trying to plunder Davy Jones’ locker, it will be able to pick up the pieces for cheap.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.